Tuesday, June 12, 2012

Do Noncompetes Kill Creativity?

I recently finished reading Jonah Lehrer's Imagine: How Creativity Works. It's an interesting book about innovation, creativity, and imagination. The book spends almost no time on the law . . . except for a brief discussion of noncompetes.

Once upon a time, Boston's Route 128 was the hot tech corridor. Lately, Silicon Valley in California has had the hot hand. What does this have to do with noncompetes?
[The Boston] companies strictly enforced noncompete clauses and nondisclosure agreements; former employees couldn't work for competitors . . . . This meant that at the Route 128 companies, information tended to flow vertically, as ideas and innovations were transferred within the firms. While this vertical system made it easier for Route 128 companies to protect their intellectual property, it also made them far less innovative . . . . Although the Boston area had a density of talent, the talent couldn't interact - each firm was a private island. The end result was a stifling of innovation. 
The vertical culture of the Boston tech sector existed in stark contrast to the horizontal interactions of Silicon Valley. Because the California firms were small and fledgling, they often had to collaborate on projects and share engineers . . . . It also helped that noncompete clauses were almost never enforced in California, thus freeing engineers and executives to quickly reenter the job market and work for competitors.
If true, this presents something of a prisoner's dilemma for employers. The optimal strategy is to expand innovation by allowing employees (and presumably ideas) to float between firms. However, employers have an incentive to defect - that is have their own employees sign noncompetes so their ideas don't get out, while allowing other companies' ideas to come in.

Of course, there are a number of other factors to consider.